Why Low-Down-Payment Mortgages Could Be a Tough Sell

Rolling up their sleeves: "There's a lot of grass-roots effort to make sure we have a lot of community involvement," said Ed Robinson, head of Fifth Third Mortgage, which has begun some targeted marketing and other outreach.

When Fifth Third Bancorp this summer began offering mortgages with 3% down, it joined a growing list of big banks that have made splashy commitments this year to expanding access to homeownership.

Through a partnership with Freddie Mac, the Cincinnati bank is offering Home Possible loans to borrowers in underserved neighborhoods. It has also sweetened the deal, offering up to $3,600 in down-payment assistance — a feature not offered by its larger peers.

But applicants are not exactly lining up at the door — at least not yet. Fifth Third has received about 70 applications since July, though it has a goal of collecting 850 by the end of the year. The bank says it is confident it will meet its target as marketing efforts continue to ramp up.

The slow start at Fifth Third illustrates some of the logistical challenges with low-down-payment programs, which are on the rise across the industry. After years of facing tight credit standards, many prospective borrowers are simply unaware that they can get a mortgage with so little skin in the game. And, following the housing crash, many are wary of doing so, observers said.

"There's a lot of grass-roots effort to make sure we have a lot of community involvement," said Ed Robinson, head of Fifth Third Mortgage. He added that, while the number of loans funded so far is "very small in number," the demand in the marketplace is high.

To attract interested buyers in two of its largest markets, Fifth Third has partnered with a Spanish-language website in Florida and a black-owned newspaper in Michigan. It has also spent time reaching out to nonprofits and real estate agents in low-income neighborhoods.

After years of essentially being shut of the mortgage market, prospective borrowers with low incomes or blemished credit histories are reluctant to move back in, according to Michael Calhoun, president of the Center for Responsible Lending.

"It's widely viewed out there that you need a 10% or 20% down payment to get a home loan, and there has been all of this publicity in the market about how credit is tightening," Calhoun said, pointing to recent survey data. "For the average person on the street, there's no reason to come in."

Calhoun noted that there is a pressing demand in the market for more affordable mortgages as many low-income individuals and families face soaring rents in major cities.

But getting the low-down-payment mortgage programs off the ground may take time. Banks are in the process of "relearning" how to lend to underserved borrowers in a "safe, sustainable" way, without teaser rates or thin documentation, Calhoun said.

Over the past year, several big banks have begun offering the mortgages with 3% down in conjunction with Fannie Mae and Freddie Mac.

Bank of America and Wells Fargo announced low-down-payment loans earlier this year through partnerships with Self-Help Credit Union, an affiliate of the Center for Responsible Lending. B of A, for instance, sells the loans and servicing rights under its Affordable Loan Solution program to Self-Help.

Fifth Third, on the other hand, sells its loans to Freddie Mac but retains the servicing rights.

The products offer an alternative to loans insured by the Federal Housing Administration. Banks have been scaling back on such loans — which include down payments of as low as 3.5% — after years of litigation with the agency over crisis-era underwriting.

"In some sense, we're shifting from one program to another," Wells Fargo Chief Financial Officer John Shrewsberry said during a quarterly earnings call in July.

Still, it is unclear whether banks have so far tapped into a large pool of interested borrower.

On the call Shrewsberry did not offer details about how the "yourFirst Mortgage" program has affected origination volume. Asked about demand to date for the 3%-down loans, a spokeswoman for Wells said the bank is encouraged by a "continued application trend."

Bank of America also declined to provide details on the demand for its 3%-down loans. "Our volume is very much as expected," a spokesman said.

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